Interest rates have been climbing and continue to climb in 2023. The US Fed is expected to implement more interest rate hikes throughout the year and it’s predicted the US Fed Funds rate could reach 5.25% to 5.50% this year.
What does this mean for your mortgage interest rates? Well, if you’re a homeowner financing your property purchase with a floating rate bank loan, you’re going to see your monthly mortgage payments increase. Local banks will likely raise the interest rates for their mortgage packages.
With interest rates remaining on an upward trajectory in 2023, how can homeowners get their bang for the buck when taking out a home loan? Many may think using fixed rate home loans is the best way to ‘escape’ these rising interest rates.
Today, we discuss and evaluate whether fixed rate home loans can take the uncertainty out of mortgage payments by helping to safeguard against potential increases in interest rates.
What Are Fixed Rate Home Loans?
Simply put, fixed rate home loans are loans with a fixed interest rate for a period between two and five years (depending on the lock-in period).
Fixed rate home loans give buyers peace of mind as it provides a guaranteed rate of repayment in the short term. This allows for better planning of finances and removes the uncertainty of a tumultuous economy.
With inflationary pressures remaining high and interest rates showing no signs of abating at the moment, those with a lower risk appetite may find the stability of a fixed rate home loan to be ideal.
What Happens After the Fixed Rate Term Ends?
Once the fixed interest rate period ends, the interest rates for the fixed rate home loan will be replaced with a floating interest rate, as determined by your bank. Often this new interest rate is higher than that of the rate during your lock-in period.
At this point, what can you do? Homeowners can choose to refinance their home loan (without incurring any pre-payment penalties) after their lock-in period is up. That’s why refinancing is a popular way to actively manage your home loan and keep interest costs low.
Homeowners can switch banks and get a more competitive mortgage package. Do note that home loan refinancing may incur additional fees, like a legal conveyancing fee. But banks often offer incentives to cover those so do check with your broker or bank for more information.
Floating rate home loans are pegged to reference rates such as the Singapore Overnight Rate Average (SORA). Banks will use these as points of reference to determine the interest rates set. The actual interest rates on the loan will be higher than the reference rates, as banks must charge a fee on top of the baseline to make a profit (known as the ‘spread’).
As their name suggests, floating rate loans mean that interest rates may change month-to-month or every few months. This means that if interest rates are constantly rising over the short-term, homeowners will find themselves forking out larger sums of money over time.
One key thing to note about floating rate home loans is that interest rates tend to be slightly lower than that fixed rate home loans. This is because homeowners are expected to pay a premium for the certainty and stability the fixed rate loans provide.
As of 23 February 2023, the standard fixed rate package offered by most banks is about 3.88%. In contrast, the most competitive mortgage package on the market (in terms of the lowest interest rate offered in the first year) is a floating rate home loan at 3.78% (as of 23 February 2023).
Floating rate home loans may thus be preferred over fixed rate loans if homeowners are confident that interest rates may fall in the short term, but the risk is always present. The inverse, of course, is also true. In an environment of rising interest rates, fixed rate loans may be the strategy to go for!
Which Fixed Rate Home Loan Is the Best Choice for Me?
At this point, if you’ve decided that refinancing to a fixed rate home loan is right for you, how do you decide which fixed rate home loan to choose?
Fixed rate home loans can differ in their interest rates and lock-in periods, as well as other conditions such as having free conversion packages, and so on. All of these are factors you may want to take into account before making a decision.
Paul Wee, Vice President – PropertyGuru Finance, agrees, "Fixed rate packages continue to be a good tool to manage interest rate risks, especially for those consumers who are more risk-averse and sensitive to interest rate changes. It is important to note, however, that should interest rate trends reverse, one may end up paying higher interest rates during the remainder of one’s lock-in period."
Interested in refinancing to a fixed rate home loan? For a start, you can use PropertyGuru Finance’s mortgage comparison tool to browse available mortgage packages across major banks with the latest interest rates, and select the best plan to refinance to.
Refinancing Your Home Loan in 2023
Deciding what type of housing loan to go for can be a difficult decision, with many factors to consider. It’s important to remember that there’s no one-loan-fit-all answer! The ‘right’ housing loan for you may not be the same as that for someone else’s and will depend on your individual financial situation and risk appetites.
With quite a few factors to consider, it’s important to understand all the options available. If you need help, you can always set up a dedicated consultation with our Mortgage Experts.
During the one-on-one session, our experts can give you honest, unbiased recommendations and advice. They can also apply for home loans on your behalf, taking all the trouble out of home loan applications – all at no cost!Chat with us on Whatsapp Fill up an online form
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